LONDON, Oct 12 (Reuters) - The dollar edged up on Friday, reflecting investor confidence in the U.S. economy, despite criticism by President Donald Trump of the Federal Reserve and a sell-off in U.S. equities.

A recent decline in stocks has yet to spread into foreign exchange markets, with emerging-market currencies still appreciating and the safe-haven Japanese yen and Swiss franc not budging significantly.

The dollar has risen 2.5 percent since July on expectations interest rates will soon rise further and on safe-haven flows from the U.S.-China trade war.

But a drop in U.S. Treasury bond yields and weaker-than-forecast rise in U.S. consumer prices saw the dollar shed half a percent on Thursday as traders cut their bets on Federal Reserve rate hikes.

Hedge funds have staked out their longest dollar positions since the end of 2016 and markets are focused on any change in economic data that could alter the Fed's thinking.

The dollar index, a gauge of its value against six major currencies, traded 0.1 percent at 95.143 on Friday, just below its monthly high of 96.15 on Tuesday.

"We doubt the dollar will derive much further cyclical support through the remainder of the year. Political uncertainty could also undermine the dollar ahead of the mid-term elections on 6 November," said Derek Halpenny, European head of Global Markets Research at MUFG.

But other analysts see few signs the dollar will fall further. Fed officials said last month they expected three rate hikes in 2019.

"If the equity markets were to calm down again quickly without developments spreading to other asset markets, there is no reason in our mind why the Fed should not continue its rate hikes as planned," said Esther Maria Reichelt, an FX strategist at Commerzbank in Frankfurt.

"The dollar will be able to maintain its current strong levels for now but further appreciation potential is limited," she said.

The euro edged down on Friday after reaching a weekly high at 1.1611 after ECB President Mario Draghi toned down his outlook for a rise in underlying inflation from "relatively vigorous" to "gradual".

ECB minutes on Thursday suggested the central bank was on track to normalise its ultra-loose monetary policy this year despite concern about slowing growth in Europe.

"We've heard quite a bit of comment from euro zone policymakers recently about rising inflation and the message is consistent, which is that price pressures are growing," said Kathy Lien, managing director of foreign exchange strategy at BK Asset Management.

The Japanese yen, a preferred currency in times of market turbulence, traded at 112.34 on Friday. It had strengthened to 111.83 versus the dollar on Thursday, its highest since Sept. 18.

The Chinese yuan fell 0.6 percent to 6.9198, its biggest daily decline in six weeks. U.S. President Donald Trump told Fox News on Thursday there was much more he could do that would hurt China's economy, suggesting no signs of backing off a growing trade war with Beijing.

The Australian dollar was at $0.7122, recovering from Monday's two-year low of $0.7039. The rally was aided by promising news out of China, its biggest trade partner. (Additional reporting by Vatsal Srivastava, editing by Larry King)